Retirement, Financial Planning

Too Many People Lack Short-Term Savings

7/6/18 8:00 AM

/iStock-462756183.jpgNearly one in four Americans have no emergency savings, according to a new Bankrate survey. Even among respondents that have set something aside to protect against a short-term financial hardship, many would still struggle to keep up with mortgage payments, health insurance premiums, and other common expenses. In fact, 22 percent of surveyed adults said that they doubt they could live off of their emergency savings for at least three months, and just 29 percent said that they would be able to cover their typical outlays for a half a year, the minimum buffer that most financial experts recommend having in place. Perhaps more alarming is that almost two-thirds of respondents said they are at least “somewhat comfortable” with the amount of emergency savings they currently have, including 24 percent that described themselves as being “very comfortable.”

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What is worse is that among the surveyed adults with no short-term savings whatsoever, almost one in five still claimed to be at least “somewhat comfortable” with the amount of money they have set aside. Such overconfidence likely means that many Americans expect to simply tap into their longer-term savings should they endure an unexpected financial setback. That is of course a problem because such funds should never be touched until you are truly ready to retire since doing so can become habitual and lower your compound growth potential. Further, if your long-term savings are kept in a 401(k) or IRA, early withdrawals will not only miss out on the tax advantages of these retirement plans but also be subject to a 10 percent penalty, apart from a few exceptions. The best way to avoid all of this is to set up an emergency fund if you have not already, and to help Bankrate recommends the following: “Automate your savings so 5 to 10 percent of your paycheck goes into a savings account. Increase your contributions anytime you receive a raise. Train yourself to put extra cash into your emergency fund until you've hit one month worth of savings — then two, then three and so on.”

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Sources: Bankrate

Post author: Charles Couch